Understanding Distributions

Understanding Distributions, SDE, and EBITDA When Buying or Selling a Business

If you’re exploring the purchase or sale of a business, you’ll often hear terms like SDE (Seller’s Discretionary Earnings) and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). These numbers are key to understanding how profitable a business really is—and how much it might be worth.

But here’s where it can get a little confusing: what about distributions? Are they included in SDE or EBITDA? The short answer is no—and here’s why.

What Are Distributions?

Distributions are how owners of a business (usually in S-Corps or LLCs) take money out of the company. Think of them as a way for owners to access profits after the business has paid its bills. They are not business expenses and don’t show up on the profit and loss (P&L) statement. Instead, they’re typically found on the balance sheet or owner equity section.

What Is SDE?

Seller’s Discretionary Earnings is a common number used when valuing small, owner-operated businesses. It starts with the business’s net profit, then adds back certain items that are considered “discretionary” or non-essential for a new owner. These may include:

  • The current owner’s salary or compensation
  • Personal perks like a car, phone, or insurance paid through the business
  • Interest, taxes, depreciation, amortization
  • One-time or non-recurring expenses

Distributions are not included in this list because they’re not expenses—they’re profit that’s already been pulled out by the owner.

What Is EBITDA?

EBITDA is a more standardized way of measuring a business’s operating performance—often used for larger companies or institutional buyers. It includes:

  • Net income
  • Plus: Interest, taxes, depreciation, and amortization

Unlike SDE, EBITDA does not add back the owner’s salary or perks, and again, distributions are not included.

Why This Matters

When reviewing financials, it’s important to focus on what’s shown on the profit and loss statement, not how much the owner withdrew through distributions. Distributions reflect what an owner does with profit, not how much profit the business generates.

For buyers, understanding this distinction helps avoid overestimating cash flow. For sellers, it ensures you’re presenting a clean, accurate financial picture—one that shows real earning power, not just withdrawals.

Bottom Line: Distributions are not part of SDE or EBITDA. Stick to the actual business performance numbers to get a true sense of value. When in doubt, consult your broker or financial advisor to make sure you’re analyzing the right figures.

Think of a business like a bakery.

At the end of the day, the bakery sells all its bread, pays for flour, electricity, employee wages, and rent. What’s left is the profit—the money the bakery actually earned.

Now imagine the bakery owner takes some of that leftover profit and buys herself a new bike. That’s her distribution—her personal use of the money the bakery earned.

But here’s the key:

You don’t count the bike purchase when trying to figure out how well the bakery is doing.

You look at the actual business operations—sales, costs, and what’s left over before the owner spends it.

So, when we calculate SDE or EBITDA, we focus on the bakery’s business performance, not what the owner did with the profit afterward.